Music: Machine is Uninterested in Music TODAY OTHER CONDUCT THAT MIGHT VIOLATE §2 INTRODUCTION TO...

Music: Machine is Uninterested in Music

TODAY• OTHER CONDUCT THAT MIGHT

VIOLATE §2

• INTRODUCTION TO THE STATE ACTION DOCTRINE

Conduct Requirement: Very Testable Issue

• Lots of Caselaw & Significant Policy Concerns

• Review Problem #5 is an old test question based on case in materials on BarBri (Am. Prof. Testing Servs.)

• Spring 2008 Question I explored conduct requirement

• Issue in many years in Question II

Conduct Requirement: Very Testable Issue

• Remember lower court decisions aren’t binding outside of own jurisdiction

• Remember that Supreme Court has shifted right since Aspen and even more since approving Alcoa and Shoe Machinery

Conduct Requirement: General Standards

From Alcoa:

• OK if survivor of group of competitors by virtue of “superior skill, foresight, or industry.”

• OK if passive beneficiary of monopoly

Conduct Requirement: General Standards

From Grinnell: • Violation if “willful acquisition or

maintenance of monopoly power”

• OK if “growth or development as a consequence of a superior product, business acumen or historic accident."

Conduct Requirement: General Standards

From Barry Wright: • Exclusionary conduct is conduct other than

competition on the merits or restraints reasonably necessary to competition on the merits, that reasonably appears capable of making a significant contribution to creating or maintaining monopoly.

Conduct Requirement: General Standards

From Berkey Photo:

• Cross-market benefits OK if any integrated firm could do (efficient production; complementary products; reduced transaction costs)

• Not OK if “using” monopoly power

Conduct Requirement: Recurring Concerns

Tension Between:• Harms caused by monopoly (high

price; low output)

• Fear of deterring innovation and aggressive competition by monopolists

Conduct Requirement: Recurring Concerns

Context for Conduct Requirement• Must show Monopoly Power or DPS

before finding liability • Greater Market Power Greater

Range of Conduct is Problematic• Liability often found re conduct that

would be fine for a non-monopolist

Conduct Requirement: Recurring Concerns

Aggregation Question• Can you find liability by aggregating

two or more types of conduct that, standing alone, would be insufficient?

• Several cases seem to allow this.

Conduct Requirement: Recurring Concerns

Aggregation Question: Policy• If overall effect of aggregate conduct

meets is to create or maintain monopoly power, should be actionable

• BUT: Very hard for monopolist to know what is allowed

• Also don’t want to make AT case out of sporadic examples of business torts

Conduct Requirement: Recurring Concerns

Aggregation Question: Approach1. Discuss whether aggregation should be

allowed at all

2. Discuss whether this particular set of acts should be actionable

OTHER CONDUCT THAT MIGHT VIOLATE §2

• Non-Predatory Pricing• Exclusive Dealing Contracts

• Predatory Hiring

• Other Predatory Conduct

• False Advertising & Other Bad Behavior

NON-PREDATORY PRICING

1. Monopoly Pricing2. Limit Pricing

3. Price Squeezes

NON-PREDATORY PRICING

Monopoly Pricing• Not bad conduct for §2 purposes

• See Berkey Photo; USFL (2d Cir. 1988)– Not anti-competitive; invites competition

– Can see as reward for innovation/skill

– Can be evidence of market power

NON-PREDATORY PRICING

1. Monopoly Pricing

2. Limit Pricing3. Price Squeezes

NON-PREDATORY PRICING

Limit Pricing• Price above monopolist’s marginal

cost, but low enough that– Existing rivals can’t meet AND/OR

– Potential rivals won’t enter

• Arises in Alcoa (re foreign producers); IBM Cases; BarBri case/Rev. Prob. #5

NON-PREDATORY PRICING

Limit Pricing: Legal Treatment• Suggestions in some lower court

cases that can violate §2

• Language in Brooke Group re price below cost suggests otherwise

• Liability may be more plausible if aggregated with other conduct

NON-PREDATORY PRICING

1. Monopoly Pricing

2. Limit Pricing

3. Price Squeezes

NON-PREDATORY PRICING

Price Squeeze• Monopolist re a raw material also makes

finished product using that raw material.– Monopolist sets price of raw material high;

finished product’s price low.– Rivals re finished product have trouble

meeting monopolist’s price.

• Form of Limit Pricing

NON-PREDATORY PRICING

Price Squeeze: Benign?• Hovencamp: Low price of finished product

may result from efficiencies of vertical integration.

• Monopolist at two levels may not be any worse in short run; can only extract same amount of monopoly profit from ultimate consumer.

NON-PREDATORY PRICING

Price Squeeze: Concerns• 2-Level Monopoly Increases Entry Barriers

(more expensive to enter on both levels)

• Monopolist cautiously pricing on one level may feel freer to take full monopoly profit

• Rivalry at one level can encourage innovation and non-price competition

NON-PREDATORY PRICING

Price Squeeze: Legal Treatment• Alcoa says improper conduct (in dicta).

• Some courts have found liability.

• Good discussion in Town of Concord (1st Cir. 1990) (Breyer) (no liability in highly regulated industry)

• After Brooke Group & Trinko: maybe only actionable if predatory.

OTHER CONDUCT THAT MIGHT VIOLATE §2

• Non-Predatory Pricing

• Exclusive Dealing Contracts• Predatory Hiring

• Other Predatory Conduct

• False Advertising & Other Bad Behavior

Exclusive Dealing Contracts

• Contracts with Suppliers or Purchasers Requiring That They Only Do Business with Monopolist

• E.g., Alcoa (pre-1912) contracts with power companies

Exclusive Dealing Contracts

Can be pro-competitive: • Insures that a dealer focuses on

your product

• Guarantees sufficient supplies from supplier

• Reduces negotiation costs for party granting exclusivity

Exclusive Dealing Contracts

Problems if Monopolist or Cartel: • Raises costs to rivals b/c fore-

closes some customers/suppliers

• If widespread, difficult for rivals to do business at all

Exclusive Dealing Contracts

Leading Case: Lorain Journal (1951) • Newspaper had effective monopoly of

news & advertising in one Ohio city.

• Radio station opens nearby

• Paper refuses to run print ads for those advertising w radio station.

• SCt finds attempt to monopolize.

Exclusive Dealing Contracts

More on Legal Treatment • Seen as clearest example of bad conduct

• Like Prototype I boycotts

• PepsiCo = case in materials similar to Lorain Journal

• Might be defensible if monopolist can show significant efficiencies result

OTHER CONDUCT THAT MIGHT VIOLATE §2

• Non-Predatory Pricing

• Exclusive Dealing Contracts

• Predatory Hiring• Other Predatory Conduct

• False Advertising & Other Bad Behavior

“Predatory Hiring”

• Monopolist hires away key employees or potential employees of rivals

• Effect may be to make it harder for rivals to do business

• Claim can be seen as a subset of exclusive dealing

“Predatory Hiring”

General Concerns• Normal competition to want to hire

best in the field

• Can only be problematic if limited supply of that type of employee

• Don’t want to impede ability of employee to market skills/self

“Predatory Hiring”

General Concerns• Most likely to be problematic if

“predatory”:– Cost of employee to monopolist is

greater than benefits

– Only makes sense as way to harm rivals

“Predatory Hiring”

Legal Treatment• Several circuits have said claim might

be actionable in some circumstances

• Some examples of tests in materials

“Predatory Hiring”

Legal TreatmentMost courts want greater showing than

mere hiring away from rival. E.g.,

• that employee didn’t help monopolist (BUT can be predatory even if help)

• evidence of harm to price or output

• part of larger pattern of bad conduct

“Predatory Hiring”

Wichita Clinic (D.Kansas 1997) • Seems to require least, although facts most

compelling• Following allegations state cause of action

– D runs largest hospital in Wichita area. – P clinic refused D’s merger overtures – D hired away 20% of P’s doctors w intent to

monopolize Wichita health care

• Note: rests a lot on intent w/o objective evidence of harm or predation

“Predatory Hiring”

Abcor (4th Cir. 1990) • D hired 2 of Ps employees

• Not actionable where– P had hired # of employees from D, so

“fighting back”

– Both employees had strong personal reasons to leave & initiated contact w D

• Suggests very fact-specific inquiry

OTHER CONDUCT THAT MIGHT VIOLATE §2

• Non-Predatory Pricing

• Exclusive Dealing Contracts

• Predatory Hiring

• Other Predatory Conduct• False Advertising & Other Bad Behavior

Other Predatory Conduct

• Conduct that is not cost-justified in the short run.

• Sensible only if intending to recoup through long-term monopoly profits.

Other Predatory Conduct

Alcoa: Predatory Expansion Theory

• Possible harms discussed in presentation of case & in outline

• Hovenkamp: Has pro-competitive aspect– Makes supplier very attractive to buyers

– Insures won’t run out of supplies

Other Predatory Conduct

Exclusion Cases that Require Predation

• Arguably Aspen/Trinko

• Some predatory hiring cases

Other Predatory Conduct

Photovest v. Fotomat (7th Cir. 1979) • D both owns and franchises kiosk

photofinishing services

• P gets contract to run 15 franchises

• D discovers that company-owned kiosks are more profitable than franchises

Other Predatory Conduct

Photovest v. Fotomat (7th Cir. 1979) Steps taken to eliminate franchises in

the aggregate = attempt to monop.:

• Increases prices to franchises

• Conceals available discounts

• Placement of new kiosks

Other Predatory Conduct

Photovest v. Fotomat (7th Cir. 1979) Kiosk placement predatory:• Opened many kiosks to reduce value of

franchises so D could buy back cheaply.

• E.g., 14 kiosks in Indianpolis, more than 1/2 on overlapping sites

• Evidence that new kiosks operating at below break-even point

Other Predatory Conduct

Photovest v. Fotomat (7th Cir. 1979)

Q: Should attempt by monopolist to rearrange own distribution system

be actionable under AT laws (as opposed to breach of contract

suits by franchisees)

OTHER CONDUCT THAT MIGHT VIOLATE §2

• Non-Predatory Pricing

• Exclusive Dealing Contracts

• Predatory Hiring

• Other Predatory Conduct

• False Advertising & Other Bad Behavior

False Advertising & Other Bad Conduct

• Possible to interfere w rival’s business through lying, coercion, etc.

• Q is when should we treat as AT violation (v. use of other laws)

• Facts of three cases described in materials (Note that two of them are aggregate conduct cases)

False Advertising & Other Bad Conduct

False Advertising (in Rev. Prob #5) • Problem if discourages purchasers from

using rivals’ products (tho can combat w own ads)

• At least 2 circuits say possible §2 claim

• Tests in cases in materials basically require harm to competition

The State Action Doctrine

• Sherman Act not intended to restrain ability of states to do economic regulation

• Acts that would otherwise violate AT laws immune if fall within exception

• E.g., Parker v. Brown (1943)

The State Action Doctrine

• Easy Cases: State officials acting pursuant to legislative scheme

• Harder cases (We’ll Discuss in Turn):– Private citizens acting pursuant to

state scheme – Acts by municipalities

The State Action Doctrine

Private citizens acting pursuant to state scheme: 2-prong test

1. “Clearly articulated and firmly expressed as state policy"

2. Conduct must be “actively supervised by State itself"